Translating what the Fed said

The Federal Reserve’s rate-setting committee meets eight times a year. Each time, the panel issues a monetary policy statement, which does a number of things: It describes the latest interest-rate stance, explains why the Fed came up with that policy, and gives a brief assessment of the economy. All well and good, but the document isn’t always easy to understand. That’s where Bankrate’s Fed translation comes in. We explain what the Fed said, and what it meant in plain English.

What the Fed said

What the Fed meant

FED: Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

Translation: Since January, the economy has been improving and fewer people are losing jobs. People are spending more, and they would spend even more if not for unemployment, stagnant wages, falling home values and tighter credit (such as reduced limits on credit cards and home equity lines of credit). Businesses are spending more on equipment and software, but less on buildings and new hires. Few new homes are being built. Banks keep saying no to loan applicants, even though money is available to lend. The economy will grow slowly for a time, and the unemployment rate will fall gradually, without causing inflation.

FED: With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Translation: High unemployment, and idle offices and factories, will keep a lid on prices for some time.

FED: The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Translation: The target for the federal funds rate will remain between zero percent and 0.25 percent for several months more. It will stay that low because unemployment is high and inflation is low and will remain low. As promised the Fed’s purchases of $1.25 trillion in mortgage-backed securities, and $175 billion in other mortgage-related debt, will be completed by the end of this month. The Fed will do whatever it takes to fight unemployment and inflation.

FED: In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

Translation: In late 2008, the Fed used some creative accounting to make sure banks would continue to underwrite student loans, car loans, Small Business Administration loans, mortgages for business buildings, and credit cards. The Fed’s loan purchases under this $1 trillion program will end soon.

FED: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

Translation: The vote to keep rates near zero “for an extended period” was not unanimous. Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, believes that economic and financial conditions have improved enough to begin signaling an eventual rise in the federal funds rate. He thinks the Fed should stop saying that it will keep the federal funds rate near zero “for an extended period.” He voted this way in January also.

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